Grey Wolf Exploration Inc.

Grey Wolf Exploration Inc.

August 14, 2006 09:00 ET

Grey Wolf Continues Growth During Second Quarter 2006

CALGARY, ALBERTA--(CCNMatthews - Aug. 14, 2006) - Grey Wolf Exploration Inc. ("Grey Wolf") (TSX:GWE) is pleased to announce its financial and operational results for the three and six month periods ended June 30, 2006:


$000's except
per share Three months ended Six months ended
amounts June 30, June 30, Percent June 30, June 30, Percent
2006 2005 Change 2006 2005 Change

Oil and natural
gas revenue 10,046 9,452 6 21,641 17,479 24
Cash flow from
operations 4,435 6,289 (29) 11,086 9,944 11
Per share-
basic 0.14 0.20 (30) 0.36 0.40 (10)
Per share-
diluted 0.14 0.20 (30) 0.34 0.40 (15)
Net income 670 1,999 (66) 3,092 307 907
Per share-
basic and diluted 0.02 0.06 (67) 0.10 0.01 900
Operating netback
($ per boe) 24.59 35.42 (31) 28.35 32.88 (14)
Average daily sales
(boe per day) 2,445 2,128 15 2,513 2,070 21
expenditures 13,192 2,383 454 42,965 4,458 864

Daily Production
Crude oil -
barrels 363 252 44 349 235 49
Natural gas -
Mcf 10,639 10,052 6 10,859 9,796 11
NGLs - barrels 309 201 54 354 202 75
boe - barrels 2,445 2,128 15 2,513 2,070 21

bbl = barrels bbl/d = barrels per day boe = barrels of oil
Mcf = thousand cubic feet Mcf/d = thousand cubic feet per day (000's)
= stated in thousands
NGLs = natural gas liquids GJ = gigajoule

"Cash flow from operations", "Cash flow from operations per share - basic", and "Cash flow from operations per share - diluted", are not measures that have any standardized meaning prescribed by Canadian GAAP and are considered non-GAAP measures. Therefore, these measures may not be comparable to similar measures presented by other issuers. These measures have been described and presented in this management's discussion and analysis in order to provide shareholders and potential investors with additional information regarding the Company's liquidity and its ability to generate funds to finance its operations.

Management utilizes "Cash flow" as a key measure to assess the ability of the Company to finance operating and capital activities. All references to cash flow from operations throughout this release are based on cash flow before site restoration costs and changes in non-cash working capital.

The calculation of barrels of oil equivalent ("boe") is based on a conversion ratio of six thousand cubic feet of natural gas to one barrel of oil to estimate relative energy content and does not represent a value equivalency - boes may be misleading, particularly if used in isolation.

Capital expenditures for the second quarter of 2006 totalled $13.2 million, a significant increase from the $2.4 million spent during the same period in 2005. The majority of the expenditures related to drilling, completions and facilities Capital expenditures for the first six months of 2006 amounted to $43.0 million, which was substantially higher than the $4.5 million spent during the first six months of 2005, due to the acceleration of the capital expenditure program in the first six months of 2006, compared to the delayed 2005 capital spending due to the early spring break-up and unprecedented heavy rainfall in the first half of 2005. Over 32 percent of Grey Wolf's capital program was directed toward construction and expansion of field infrastructure to reduce the time required for future tie-ins and to assist Grey Wolf in placing production onstream quickly.

Total production in the second quarter of 2006 averaged 2,445 boe per day, a 15 percent increase over the 2,128 boe per day recorded in the same period of 2005. The increase in production was attributable to the successful drilling in the Pouce Coupe and Valhalla area. However, second quarter production was curtailed as a result of a five week plant turn-around. This curtailment resulted in lost production of approximately 270 boe per day as an average for the quarter. Second quarter production would have been approximately 2,800 boe per day if all shut-in and curtailed production was added back.

Total daily crude oil and liquids production increased 61 percent to 703 boe per day in the first six months of 2006 from 437 boe per day in the first six months of 2005. Natural gas production increased 11 percent during the first six months of 2006 to average 10.9 MMcf per day from 9.8 MMcf per day in the first six months of 2005.

Production revenue from crude oil, natural gas liquids and natural gas sales increased six percent to $10.0 million in the second quarter of 2006 from $9.5 million in the second quarter of 2005. Increased production during the first six months of 2006, compared to the first six months of 2005, was the primary reason for the 24 percent increase in total revenues to $21.6 million from $17.5 million recorded in the first half of 2005. The average price realized for the first half of 2006 for natural gas was $7.08 per Mcf, two percent lower than the $7.22 per Mcf received in 2005. The first half average price for natural gas liquids of $51.67 per bbl represented a six percent reduction from the same period in 2005. Average crude oil realizations rose 12 percent to $70.03 per bbl during the first half of 2006 versus the $62.59 per barrel received in 2005.

The Company recorded net earnings of $0.7 million during the second quarter of 2006, down 66 percent over the same period in 2005. Cash flow from operations decreased 29 percent to $4.4 million in the second quarter of 2006 from $6.3 million in the second quarter of 2005. The decrease in both earnings and cash flow from operations during the second quarter of 2006 was attributable to the sharp decline in the natural gas price, an increase in royalty expenses and higher operating costs.

Net earnings of $3.1 million recorded in the first six months of 2006 increased from $0.3 million over the comparable period of 2005. The increase in earnings was a result of higher production levels and the elimination of $3.2 million of non-recurring expenses related to the early repayment of a US$35.0 million term loan on February 28, 2005.

Cash flow from operations increased 11 percent to $11.1 million in the first six months of 2006 from the $9.9 million during the first six months of 2005. The increase in cash flow for the first six months of 2006 was primarily due to the increase in production volumes.

Production expense in the second quarter of 2006 increased to $2.0 million or $8.84 per boe compared to $1.0 million or $5.24 per boe for the same period of 2005. Operating costs for the second quarter of 2006 were higher on a boe basis for the following reasons: The new wells on stream during the second quarter of 2006 required additional compression in the field. The rental of these compressors increased operating costs by approximately $1.30 per boe. The industry wide labor shortage resulted in increased contract operating fees, and fuel surcharges by trucking companies due to rising gasoline prices increased the cost of trucking oil to the terminal. Installation of pump jacks at our Knopcik field required the purchase of propane fuel to operate this equipment. All of these factors contributed to higher operating costs in the second quarter of 2006. As a result of the increased costs and curtailed and shut in production, we estimate operating costs for the remainder of the year to be in the range of $7.00 - $8.00 per boe.

Operating netbacks of $24.59 per boe decreased by 31 percent in the second quarter of 2006, compared to the $35.42 per boe in the second quarter of 2005. The decrease was the result of lower natural gas prices, higher operating costs and higher royalty burdens; somewhat offset by a slight decrease in NOVA transportation expense. Operating netbacks decreased by 14 percent to $28.35 per boe for the first six months of 2006 compared to the $32.88 per boe for the first six months of 2005.

Mr. Watson, Chairman and Chief Executive Officer stated "Despite the temporary disrruption to our production flow, it is important to remember that our production capability remains strong. Average production for the month of July was approximately 2,200 boe/d; approximately 700 boe/d of production is curtailed or shut-in, and we have an estimated 900 boe/d awaiting completion, tie-in and repairs to third party facilities."

On April 11, 2006, Grey Wolf received notice from PrimeWest Energy Inc. ("Prime West") of its election to purchase Grey Wolf's interest in the portion of the Caroline Farmout Lands pursuant to the Caroline Farmout Agreement (the "Agreement"). The purchase price, which has not yet been determined, shall be equal to the net present value of the estimated future net cash flows from such properties, before tax, from proven reserves and 50% of probable additional reserves, as set out in an engineering report acceptable in form and substance to Grey Wolf and PrimeWest, by a specified engineering consulting firm in accordance with National Policy 2-B (the predecessor policy to National Instrument 51-101) using an escalating price forecast, less $1,000,000 and subject to customary adjustments. Grey Wolf and PrimeWest will be required to finalize a purchase and sale agreement to effect the sale. Subsequently, it is anticipated that during August 2006, Grey Wolf will enter into a definitive agreement with PrimeWest to sell certain assets in the Caroline area of west central Alberta.

The significant increase in demand for and the shortage of skilled labour, created inflationary pressures on service costs. The warmer than normal winter weather in North America left gas storage levels at historical highs. This high storage level has driven down the natural gas prices in the past few months. The geopolitics and the conflicts in the Middle East have pushed the oil price above the $70 per bbl level. All of these factors have a significant impact on the financial results of the Company and we expect the commodity prices will have continued levels of high volatility over the remainder of 2006. Grey Wolf will respond swiftly to these changing conditions to ensure the continued and profitable growth of the Company.

Grey Wolf's second quarter 2006 financial statements and related management's discussion and analysis are available at or the corporate website at

Grey Wolf is an independent Alberta-based, junior oil and natural gas company involved in the development and production of natural gas and crude oil in the Western Canadian Sedimentary Basin. Its common shares trade on the Toronto Stock Exchange under the symbol "GWE".

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Grey Wolf's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Grey Wolf's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Grey Wolf's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. No assurance can be given that any of the events anticipated will transpire or occur, or if any of them do so, what benefits Grey Wolf will derive from them. Grey Wolf disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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